Market Summary

The S&P 500 finished higher in seven of the past eight sessions ending with a weekly gain of 3.3%, its best week since Dec. 2015, as investors regained some optimism after a period of heavy volatility since late August on concerns about global growth and uncertainty about U.S. interest rates. For the week, the Dow gained 3.7% while the Nasdaq rose 2.6%. The gain for the Tech-heavy Nasdaq put it back into positive territory for the year. The small cap Russell 2000 led the major indices by finishing up a massive 4.6%. We've had a very good week and a very good start to the fourth quarter. "We've had a very good week and a very good start to the fourth quarter," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "Next week third quarter earnings season begins in earnest. The release of last week's disappointing jobs report contributed to the gains. The disappointing report sent a signal to investors that the Federal Reserve might delay raising interest rates until the end of the year. That thought was reinforced Thursday, when the minutes from the September Fed meeting showed policymakers are too concerned about low inflation and the slowdown in China to raise interest rates. "In short, we found little to change our view that the first Fed hike will not occur in 2015 (and the) market has reached the same conclusion," wrote Ajay Rajadhyaksha, head of fixed-income at Barclays, in a report.

A tool to help confirm the overall market trend is the Bullish Percent Index (BPI). The Bullish Index is a popular market "breadth" indicator used to gauge the internal strength/weakness of the market. It is the number of stocks in an index (or sector) that have point & figure buy signals relative to the total number of stocks that comprise the index (or sector). So essentially it is the percentage of stocks that have buy signals. Like many of the market internal indicators, it is used both to confirm a move in the market and as a non-confirmation and therefore divergence indication. If the market is strong and moving up, the BPI should also be moving higher as more and more stocks are purchased. Last week analysis opined "...the recent selloff might be over...support held this past week; now the question is will prices jump higher or establish a range-bound trend..." The updated chart below shows prices moving higher, with plenty of room to continue upwards.

In the chart below, the Aggregate Bond ETF (AGG) represents the "bond" market and the Equal-Weight S&P 500 ETF (RSP) is the stock market benchmark. Equities were selling off after the FMOC decided not to raise interest rates. The updated chart below indicates investors are now starting to sell off bonds and use the funds to bid up stocks.

A standard chart that we use to help confirm the overall market trend is the Momentum Factor ETF (MTUM) chart. Momentum Factor ETF is an investment that seeks to track the investment results of an index composed of U.S. large- and mid-capitalization stocks exhibiting relatively higher price momentum. This type of momentum fund is considered a reliable proxy for the general stock market trend. We prefer to use the Heikin-Ashi format to display the Momentum Factor ETF. Heikin-Ashi candlestick charts are designed to filter out volatility in an effort to better capture the true trend. Last week's analysis said "...downward momentum is dissipating and trying to turn higher while strength indicators are signaling an oversold bounce..." The updated chart below shows the oversold bounce is converting into a full-blown uptrend with confirmed bullish momentum. Now the next logical question is will stock prices attain August highs.

Market Outlook

Recent comments mentioned "...while there are some historical declines in October, it also known as the "bear killer". More bottoms are made in October than any other month, and while it has a negative stigma, the month overall is solidly bullish on the historical calendar. Furthermore, the final quarter of the year is historically the best performing period..." Investors are now positioning themselves to respond to corporate earnings, which start in earnest next week when most of the nation's largest banks report their results, as well as big companies like Intel, Netflix, UnitedHealth and General Electric. Earnings are expected to drop approximately 5.5% from a year ago, according to FactSet, primarily due to the sharp drop in commodity prices. Financial services companies are expected to show earnings growth of 8.4%, trailing only telecoms and consumer discretionary companies in expected growth for the quarter. However, that growth is down from the 14.8% expected at the start of the quarter, and down by half from the 17.8% growth expected at the start of the year.

In the chart below, the dollar dropped to a six-week low Thursday, after minutes from the Federal Reserve's latest policy meeting showed central bank officials worried about inflation, adding to concerns that the U.S. economy may not be strong enough to support a rate increase any time soon. Treasury bonds finished the week lower, posting their largest weekly decrease since late August, as investors sold U.S. government debt, perceived as a safe investment in favor of riskier assets amid a global stock market rally. Rallies in global markets, including a weekly surge in the major equity indexes put government bonds under selling pressure all week. Gold prices rallied on Friday to settle at the highest level since late August as expectations for a further delay in U.S. interest rate hikes weakened the U.S. dollar, lifting precious metal's investment appeal.

We like to compare the DOW Industrials and Transports to confirm the current market trend. Last week's analysis "...both the DOW Industrials and Transports bounced off a support level. This is further confirmation the stock market is setting up for a recovery bounce..." In this week's chart the DOW Industrial and Transports confirmed the market's current uptrend.

The CBOE Volatility Index (VIX) is known as the market's "fear gauge" because it tracks the expected volatility priced into short-term S&P 500 Index options. When stocks stumble, the uptick in volatility and the demand for index put options tends to drive up the price of options premiums and sends VIX higher. Last week we observed, "...the VIX is falling as the S&P is trying to creep higher. If the VIX and S&P converge this is a solid indicator that the market may have bottomed out..." You can see in the chart below how the VIX and S&P intersected as the stocks moved up and volatility sank. We now have a confirmation that the market has bottomed and converted into an uptrend.

Last week's analysis said "...Next week is critical for guidance on whether volatility will wane or remain elevated...the VIX trended down last week and is threatening to break below support...momentum indicators starting to turn bearish and if this move continues expect the VIX to continue falling..." This analysis played out as advertised. As highlighted in the current chart, the VIX is in a confirmed downtrend with bearish momentum. The Volatility Index finished the week down over 18% and there is room for the VIX to continue falling before being oversold.

Put/Call Ratio is the ratio of trading volume of put options to call options. The Put/Call Ratio has long been viewed as an indicator of investor sentiment in the markets. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa. Technical traders have used the Put/Call Ratio for years as an indicator of the market. Most importantly, changes or swings in the ratio are seen as instances of great importance as this is commonly viewed as a change in the tide of overall market sentiment. Recent comments mentioned, "...traders have significantly reduced put exposure...current Put/Call Ratio indicates investors are content that current market support level will hold up and avoid a bear market decline..." You can see in the current Put/Call Ratio how traders are now extremely bullish. After weeks of buying a lot more puts compared to calls, traders are buying more calls to bet on stocks as earning season progresses. Plus there are rumors floating around suggesting that many of the big hedge funds and prop trading firms had 'lifted' their downside protection hedges.

The American Association of Individual Investors (AAII) Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. The current survey result is for the week ending 10/07/2015. The most recent AAII survey showed 37.50% are Bullish and 28.20% Bearish, while 34.30% of investors polled have a Neutral outlook for the market for the next six months. We recently said "...the current AAII result is considered near term bullish...the current excessively bearish reading suggests the market is due to for a bounce..." This analysis has been validated as the market is bouncing higher. The current AAII survey supports follow-through on the current bullish market move.

The Nation Association of Active Investment Managers (NAAIM) Exposure Index represents the average exposure to US Equity markets reported by NAAIM members. The blue bars depict a two-week moving average of the NAAIM managers' responses. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks. The current survey result is for the week ending 10/07/2015. Second-quarter NAAIM exposure index averaged 72.84%. Last week the NAAIM exposure index was 16.39%, and the current week's exposure is 38.30%. The most recent NAAIM analysis indicated "...professional money managers' equity exposure fell to the lowest level since about this time last year...note that immediately after hitting rock bottom last year, equity exposure surged higher for the rest of the year..." As suggested, NAAIM equity exposure is starting to bounce after falling to the lows for the year.

Trading Strategy

Last week's Trading Strategy discussed how "...In the last couple of years, after September 19th, the S&P traded lower into month's end and made a bottom sometime in the early part of October, and in turn rallied into years end. That's exactly what we could see this year as fund managers have seen their year-end bonus disappear with the selloff. They got too short after the initial low was made, and now need to markup stocks with a yearend rally to restore their positive performance..." In the graph below we can see that over the past month, 9 of the 10 major S&P sectors surged. Healthcare is the only losing sector during this period. Now might be the time to reduce bearish bias, but don't go overboard on the bullish side, either. The recent rally has been led by cyclical stocks, which are composed of the Energy, Materials, and Industrials sectors. The current move toward cyclicals follows a long stretch in which they lagged.

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